Transcripts For CSPAN3 Hearing Examining Credit Debit Card Transaction Fees 20220718

And debit card. The senate before the Senate Judiciary committee is two hours. Good morning, this hearing will come to order. American consumers today are rightly worried about inflation and rising prices for the goods they buy. Today we are going to talk about a hidden fee that fuels the fires of inflation across america every day. What they may not know is this wifi is contributing to the problem of inflation. When swipe fees on credit and debit card to go up, as they just recently did, it increases inflation. Consumers ultimately pay the price. Ironically, this journey for me started in this very room 16 years ago. Arland specter was the chairman of the Senate Judiciary committee. He called a key meeting on swipe fees and interchange fees. I intended because i was not familiar with those terms. I heard for the first time wettest life we was. The fact that i use my debit card and credit card a swipe fee was being charged to the retailer that i was ultimately paying. And then i learned that there was virtually no negotiation in those fees. Retailers were at the mercy of credit cards and banks in terms of what those fees would be. There was no competition, because we have a democracy here well represented at the table. This created a situation where the Market Forces really do not work. They are not supposed to work. They are not designed to work what has happened in america as we all know, the statistics on the amount of americans paying with plastic tells the story. These are from 2020. Im sure after the pandemic and our change in lifestyle, they are even greater. The number of 2020 transactions involving debit cards 86 billion. The amount involving credit cards, 41 billion. Between the two credit and debit cards in 2020, 127 billion transactions in america. How are we doing with cash transactions . 32. 8 billion. How about the use of a check . Five. Five billion. So, we are becoming a nation that clearly, maybe even a world, that pays with plastic. Today we are going to ask a few questions about how those payments are made, and the charges that are imposed. This Committee Held a hearing with witnesses from bees and mastercard 16 years ago to discuss anticompetitive fees. We are back. Here is what ive learned. Because im asking target row about 80 of the credit and debit card market. They have established a system of fees and rules that apply to every transaction of the billions that i just mentioned, involving cards used by thousands of banks. And each time a credit or debit card is used, visa and mastercard charge fees that take a cut out of the transaction. You dont see it on the check in the restaurant, but its there. Some of that cut they keep for themselves. Most of it is given to the bank that issued the card. The fee that wasnt massacred require the merchant to pay to the chartarum bank is called an interchange fee. It is usually charged as a percentage of the transaction plus a flat fee. For example, 2 plus ten cents per transaction. That means when a card transaction of 100 is made, the merchant gets less than 98 after the fees are deducted. Merchants and of raising the prices of their products to make up for the deducted fees. You might ask, how much have americans been charged by interchange fees of visa mastercard since that hearing 16 years ago in 2006 . According to Payments Consultancy ms p. I. It is 794 billion dollars. All built into the prices retailers have to charge and consumers have to pay. Interchange fees are designed to avoid competitive market pressures. Banks get the fees, but they do not set the fees. Instead the banks led visa and mastercard set the fees on their behalf. The same schedule of fee rates applies for all banks on the network. This means that all banks on the network or guaranteed to same interchange fee, regardless of how efficient or inefficient the banks in running a card operation or preventing fraud. It is a gravy train. When visa mastercard raise interchange fees banks want issuing more cards because they make more on each flight. These elastic are profit when there are more swipes, because they make their own cut, called a network free, from the merchant on each flight. Merchants and the customers take it on the chin. We will hear that firsthand today. What can merchants do to try to keep them or to feast down . Not much. Visa and mastercard are negotiating agents for thousands of banks. If a merchant wants to be able to accept payment from those banks customers they have to agree to visa and master card fees in terms. I remember at that hearing 16 years ago, and at that table one of the customers one of the retailers had a stack about three inches tall. They had asked for a copy of the contractual agreement with visa and mastercard when it came to opposing fees. They quickly feed this isnt a complete contract they would only give us part of it. Three or four inches tall you expect a grocery store, a restaurant, to go through all of this . Bottom line, when fees go up it costs more to use money. And that cost gets built into prices consumers pay. Visa and mastercard raise their swipe fees two weeks ago, despite bipartisan opposition from congress. It was obvious, we are suffering from inflation. Dont raise these hidden fees again they did it anyway. Senator marshall and i, representatives wells and vandyne urge them not to do it, they didnt listen. We will talk about it today. The credit and debit card system are not competitive in the market places. When you dont have real competition, what happens . You get higher cost, less innovation, weaker security. New potential competitors get stifled. It is a sweetheart deal for the dominant networks, biggest banks, and for certain cardholders who have received reward programs. The average Small Business and consumer, they pay the price. Other countries have figured this out, incidentally. You cant have a fair system when you let networks fix the slight fees without regulation or competition. The European Union, australia, china, israel, india, south korea and more have stepped up to create reasonables wifi limits. We have the durban amendment, which applies only to debit card. In 2010 i wrote that law that were placed reasonable limits on debit interchange fees that visa immense card set on big banks. It has generated a lot of talk over the last few years. And a lot of teeny commercials. Boy, the big banks hate to durban amendment like the double hates holy water. In the absence of a competitive marketplace there needs to be some limit on visa mastercard fee fixing. Here are a few steps i would like to suggest. Lets have transparency, make it clear to consumers in their monthly statement how much of their car purchases are being deducted as interchange fees. You know you have that information. You know you can provide it. Maybe if consumers knew how much their cards were costing their favorite restaurants and retailers, they would use less costly cards. Second, lets stop the practice of charging swipe fees on the part of the transaction amount that is sales tax. Thats a slight tax on top of a sales tax give the consumers a break. Lets stop the exclusivity deals where bees and mastercard tells banks they cant use any other network on the cards. Lets give merchants a choice of car Network Options on each swipe in each online sales. But make sure that someone beside the dominant network plays a role in setting Security Standards for cards. Security innovators and startups are being shut out of the current system. Lets reduce Inflationary Pressure by preventing network fixed by fees of being jacked up to unreasonable levels. We have a lot to talk about today we are joined by distinguished panel. I thank you for joining them in the spirit of discussion. Let me turn to senator grassley. First of all, mister chairman, thank you for holding this hearing. Thank you for working with us on the side of the aisle to make sure that the interest of all stakeholders are taken into consideration. And are particularly want to thank you for including Financial Institutions in the panel. Interstate slight fees sees the amount of money merchants except in using a debit or credit card. These fees vary depending on many factors. And general, and up being between one to 3 of fortresses. I just learned, including sales tax. A great focus has been paid to these fees as more and more consumers use credit and debit card to make their purchases. As many of my colleagues know, this is an issue that has passionate voices on both sides. Many iowa businesses have complained that it seems that these fees are high for accepting credit and debit card for purchases. These businesses want to give their customers the option to pay using different methods, but that can be difficult. Fees are eating into already tight margins, especially for Small Business owners. These fees may then be passed along to the consumer. On the other hand, there are a number of benefits to card usage for both consumers and businesses, including convenience, security, and increased purchasing power. Consumers may spend more money on cards than if they use cash. Consumers may also benefit through rewards and cash back on their cards there is a balancing act here that we need to acknowledge, and that any future action should be carefully considered for possible impact. I look forward to hearing from all of you on this subject. As this is a Judiciary Committee hearing, we are looking at competition and whether interchange fees are set above rates that would be found in the competitive market. Two witnesses here today represent visa, mastercard, the two largest Payment Networks in the United States with over 80 share of the credit card market. I look forward to hearing whether these rates reflect Market Forces. I think that one a subject like this comes up, particularly at the time of high inflation, thats a factor that brings attention to a lot of the expenditures that people might feel are unnecessary. It seems like every industry, including merchants and banks, have been blamed by the president for inflation. The blame game doesnt work as President Biden spends trillions of dollars of money as fast as could be spent. A liberal wish list, even warning about inflation. Earlier this month, a bureau of labor statistics reported the 12 month increase of inflation for march was percent year over year. This was the largest increase in over 40 years. All of this obscure is the actual rising costs that i winds have been hit with in the midwest. The price of ground beef 24 and a half percent off. Bacon, 26 up. Pork chops, 23 . Chicken, 31 . Eggs, 22 . These are not luxury items. But absolute necessities for families dinner tables. These staggering increases are negatively impacting all americans. We must get them under control. That is not by spending trillions more that is being proposed. I yield. Thank you, senator. We have six witnesses, thank them for joining us. Im going to give a short introduction to each before they are recognized. First witness is Laura Shapira karet. She is chair and ceo of giant eagle, a Supermarket Chain headquartered in pittsburgh. 470 locations throughout pennsylvania, ohio, West Virginia and indiana. She served as ceo of giant eagle since 2012. Previously served as the Vice President , chief strategist officer and senior Vice President of marketing. She worked for giant eagle since 2000, has a bachelors degree from amherst. Glad to have you here. Second witness, bill she. He is responsible for strategic initiatives. Previously served as visas president of europe, north america and latin america. He helped lead the companys restructuring in 2007, and its ipo in 2008. Undergraduate degree from West Virginia university and an mba from notre dame. Thank you for being here. The next witness is linda kirkpatrick, president of north america for mastercard. She oversees mastercards operations and customer facing activities in the u. S. And canada, shes been with mastercard since 1997, and she previously served as leadership role involving investment relations, u. S. Strategy and communication, u. S. Issuers and global rules and standards, compliance programs and dispute resolution management. A degree from manhattan ville college. Thank you for joining us. Next witness is ed mierzwinkski. Did i get it right . That is because i represent chicago. He is the senior director from the federal Consumer Program at the u. S. Public Interest Research group known as pirg. Oversees the federal Consumer Program, helps to lead National Efforts to improve Consumer Credit reporting laws, identity theft, protections, product safety regulations and more. Cofounder of the americans for financial reform, received his undergraduate degree and masters degree from the university of connecticut. Senator blumenthal, take notice. Our next witness is charles kim, executive Vice President and chief Financial Officer of Commerce Bank shares all financial the Company Strategic planning, competing operations, consumer card business. Hes been with Commerce Bank, he received his undergraduate and be eight degrees from Washington University in st. Louis. Final witness is doug kantor. Since 2021, mr. Kanter served at the general counsel for National Association of Convenience Stores. Previously practiced law at stepped o and johnson, general counsel to the Merchant Payments Coalition among other organizations. His career he worked as deputy chief of staff at the u. S. Department of housing and development. And as a Public School teacher. Received his b. A. From the university of virginia, his jay di from yale law school. Again, thanks to all the witnesses for being here. It is customary in this committee for us to ask you to take an oath to tell the truth. If you get all please stand and raise your right hand. Given the testimony youre about to give before the committee will be the truth, the whole, truth and nothing but the truth, help you god . Let the record reflect that all the witnesses answered in the affirmative. And now gives them permission to proceed. Were going to start with miss karet. Chairman durbin, Ranking Member grassley and members of the committee. I am laura karet, ceo executive chair of giant eagle. One of the nations most largest format food 34,000 team members operating more than 470 corporate and independently owned and operated store locations throughout five midwest states, including pennsylvania and ohio. On april 22nd of this year, with no negotiation or threat of competition constraining them, visa and master card imposed a fee increase that will cost giant eagle one point 3 million annually. I appreciate the opportunity to talk to today about the impact of swipe fees on our business. Im also proud to serve as vice chair of an f and i, Food Industry association, fmi works with the entire Food Industry to advance a safer, healthier and more efficient safety food supply chain. Fmi membership includes 1000 supermarket Member Companies that collectively operate 33,000 food retail outlets and employ 6 million workers. Our industry historically operates on razor thin margins of one to 2 . We operate in a highly competitive market and as inflation has driven prices higher, our customers have become conscious of how they are spending their money driving down profits. There are three points id like to me today. First, giant eagle swipe fees have materially increased overtime. The april 22nd the unilateral increase will only extirpate this problem. These and mastercard control 85 of the market, on april 22nd of this year, both visa and mastercard increase the fees retailers pay and they also created new categories of fees. Every bank that issues credit and debit cards adopted these fees without deviation or exception. In my estimation, this cannot possibly comply with the letter or the spirit of our nations antitrust laws. This latest price increase fits the pattern we have seen for years. Giant eagle has been paying higher and higher payment fee costs. Electronic tender sales make up 82 of our Sales Transactions for a company. Of the 82 through electronic tender, 37 of the total sales are visa and mastercard. When you look at the total card processing fees, these and mastercard make up over 62 of those fees. Over the past four years, visa and mastercard fees have grown from 57 of our total fees to 62 of our total fees while at the same time visa and mastercard sales as a percentage of total sales have declined by almost 2 . In stark contrast, during the pandemic, my company and others like it were authorized by the usda to accept online payments for our Customers Using the supplemental nutrition assistant, snap, e t cards. Its interesting to note that the snap electronic transactions are completed securely without visa or mastercard and without occurring any swipe fees. It is hard for us to understand why snap ebt cards could but bees and mastercard used it as an avenue to raise prices. Second, many millions of customers suffer one swipe fees increase. Because of the unilateral fee increases, fees and mastercard my company and my customers will push pin additional 1. 3 million in swipe fees. This fee increase came on the heels of visa reporting on its march 22nd, 2022, quarterly financials. The profit margin with just above 50 . Third, there must be competition in the debit and credit card markets. Visa and master cards are the only vendors that giant ego cannot negotiate with. One giant eagle buys ketchup or paper towels, its suppliers compete to give daniel the best price. Ultimately our, customers benefit from a pet competitive market. In contrast, fees and mastercard to not compete for merchant. Business the. Fees associated with accepting any type of payment for a particular good should be incidental to the transaction. Should certainly not be amongst our highest transactions. This expense, slight fees, is their only two labor and rent that we face. I applaud this committee for looking at ways to apply competition in credit and debit cards, similar to the competition that we much take part in every day. I will be pleased to answer your questions. Thank you miss karet, [inaudible] make sure that button im sorry. Good morning. Chairman durbin, Ranking Member grassley, members of the committee. Thank you for the opportunity to testify today. For more than 60 years, visa had enabled people, businesses, and government, to make and receive payment through secure transaction network. Im pleased to share with the committee in which leases promotes safety, security and drive Economic Growth and Financial Inclusion. Recently we have taken a number of important steps to support the economy to maintain the security, reliability, and stability of our network. These steps are intended to help businesses of all sizes, including those that may be struggling due to the effect of the pandemic, and consumers across the country. At the outset of the pandemic, we out lowered interchange rates, for certain key segments including grocery stores, restaurants, and education. In april, we lowered interchange rates for the majority of u. S. Businesses. Visa is also taking steps in making online payment more secure by encouraging the use of secure digital token so the transactions can be process without sharing the cardholder sensitive account information. Implementing changes designed to promote accurate transaction processing. As a payment network, visa takes its role in setting interchange rates very seriously with the goal of fostering balance, stability, while growing the overall payment ecosystem. It is important to note that because it does not earn revenue from interchange fees. Our brand promise has always been rooted in being the best way to pay and be paid. We remain steadfast enough focus to deliver on this commitment. Our success is based heavily on investment in and continuously enhancing the security of our network. More so than any other part of our business. Trust in security of the foundation of everything we do. In the last five years we have spent over five billion dollars on Fraud Protection and security. In 2021 alone, our front prevention programs help merchants in Financial Institutions prevent nearly 26 billion dollars in fraud. Car holders choosing these it can count on our zero Liability Protection on zero author and transactions. Zero liability, inefficient dispute resolution. Merchants who choose to accept visa, excuse me, are guaranteed payment when a transaction is properly authorized on our network. Competitive pressures on visa to maintain and improve upon its reliability, innovation, and security have never been more pressing. New competitors, new ways of paying, advances in security as well as cyber risks are emerging at a dizzying pace. As consumers and merchants fatally more often, getting into payments its become as easily as developing in marking an attractive app. The growing number of Payment Options especially online is a reflection of this competitive environment. They continued expansion of emerging choice and payments. In addition to cash, checks, and traditional u. S. Payment networks, we also compete today with digital wallets, by now pay later solutions, finn tech and big tech, realtime Payment Systems and cryptocurrencies. With this mathlete changing competitive environment, visas even more clear about our first order priority. Our success depends on our ability to deliver innovative, safer, more secure payments and a strong Value Proposition to merchants and consumers alike. Payments will continue to evolve through new payment uses, new businesses, new frictionless commerce. However, regulatory interventions focusing a scoop six leon Card Networks could shift Consumer Spending away from members like visa to more expensive methods with more risks, less reliability, and if you were preventative measures and reliability. Fog fighting here is another truly important benefit of our network is we level the Playing Field between large and small players. The investments that we have made have unable to small retailers and Community Banks and Credit Unions to compete with larger merchants and larger banks to could deliver larger capabilities, positive customer capability, and security protections. This has created a vibrant, competitive environment which the allows american in global economies to grow. We appreciate the opportunity to address the committee on these important issues. I look forward to taking your questions. Thank you very much, mister sheedy. Miss kirkpatrick from mastercard. Good morning chairman member durbin, Ranking Member grassley, and the committee. I am linda kirkpatrick, im the chairman of matt to current. North america. I am here to discuss things with. You first the value massacre brings to merchants, banks, consumers, and governments. Second, recent interchange adjustments. And third, the robust competitive environment in which we operate. Having worked at mastercard for 25 years i can personally attest to the value that we bring to our stakeholders. Our role is to enable commerce in a safe and secure way. For banks, we provide products that support their Customer Base, allowing them to deepen relationships and extend financial tools to consumers. For Credit Unions who helped people buy homes and start businesses, our products allowed them to more effectively support their communities. The value we bring to banks is evidence by the greater in 44 growth in cards in the u. S. Over the past five years. For merchants, Electronic Payments provide them with benefits and protections they dont receive from cash and check. In addition to increased sales and operational savings, merchants receive guaranteed payments, even when consumers dont pay their bills. Banks absorb these costs, which are on average higher than the average merging cost of acceptance. Mastercard is deeply committed to small merchants. Within the first weeks of the pandemic, we announced a 250 Million Dollar financial package to support them through this crisis. The value we bring to merchants is clearly demonstrated by the growth in global locations where our products are accepted. Which is nearly doubled over the last five years. This includes an incremental 24 million Small Businesses since 2020. For consumers, mastercard products provide access, convenience, and peace of mind. Consumers are never responsible for a fraudulent activity which may occur on their counts. Further, Electronic Payments kept commerce alive for consumers and Small Businesses during the pandemic. In fact, the u. S. Government used our products to quickly deliver critical aid to vulnerable americans. This value is clearly demonstrated by this band on our products in the u. S. , which has grown nearly 60 over the past five years. To be clear, banks, merchants, and consumers are all critical stakeholders for mastercard. Their success is our success. This is why we work so hard to find balance in the system. In particular, i have personally spent many years supporting in partnering with merchants across their cobra and portfolios and other services. As part of balancing the entrances of all stakeholder groups, mastercard say default interchange rates are the fees charged by for the benefit of guaranteed payments, transaction processing, and accounts harvesting. Mastercard does not earn revenue from interchange, nor do we set the fee charged directly to the merchants. Our rates seek to incentivize both cart issuance by banks in card except and by merchants. Without these rates, more than 90 million merchants would need individual contracts with thousands of banks which would be impractical. In 2020 we announced our intent to adjust rates to reflect current Market Conditions and investments. These adjustments represented the first significant changes in over a decade. After a twoyear delay resulting from the pandemic, we implemented changes to our default rates which included some increases and some decreases, including from small merchants. Based on our modeling, the net impact of these and other recent changes is virtually neutral to the ecosystem. Finally, i would like to note that the payment industry has never been more competitive than it is today. In addition to cash and check, we aggressively compete with several global and regional networks. And increasingly with buy now pay later providers. Person in person to account to account services. Realtime payment platforms. Digital currencies, what providers, in other forms of payment. There is no question of the variety of Payment Options available to consumers is robust. Mastercard does not hold or exercise market power. We embrace consumer choice, and have been this concept into our Business Strategy in summary we are deeply committed to supporting all of our stakeholders including merchant banks, governments and consumers. We are extremely proud of the way our products unable Financial Inclusion and choice to consumers. And Small Businesses to help them thrive. I appreciate the committees time, i look forward to your questions. Thank you, miss kirkpatrick. Mr. Mierzwinkski, please. Thank you, senator durbin. Chair durbin, senator grassley, members of the committee i am ed mierzwinkski. Im with the u. S. Public Interest Research group. We are a non profit Consumer Advocacy Organization and service the National Office for the state perks. All consumers pay more of the story and more the pump because of nonnegotiable nontransparent fees that are set by the Card Networks and not by the banks themselves. When i testified in 2010 chair turban before your appropriations committee, that was the matter that even the government couldnt negotiate the prices that it paid for buying and selling things on its government platforms. Its incredible to me that even the government is not big enough to hold visa and mastercard accountable. The worst problem occurs if you are a small merchant having to pay your second highest price of cost of good sold might be higher, rent might be higher but probably bank fees are the next highest fee that you pay. So what do you have to do . Because of the complicated rules that you discussed in your Opening Statement senator durbin the inches thick contracts et cetera et cetera they forbid the merchant from doing anything to,, low, the costs in in his store. He has no cost to big the price of these over priced swipe fees into the cost that everybody pays including the cash customers, who might be low income and they are probably subsidizing and despite wet all of the associations and networks will say today, the bulk of the interchange feet goes to pay for affluent consumer rewards cards. It does not go to the other important issues of security. Those are small items compared to rewards. Im very happy that youre holding this hearing, and i want to point out that there is really nothing to restrain these networks in this market failure that we have in the card network ecosystem. Talking about percentage based fees, when prices go up because of inflation, the bank earns more money without doing anything or without making anything. Visa, i believe, has been quoted recently in earnings calls and the press. Inflation is a net win for us. So it is a market failure. I want to commend the durban amendment for going after some of the key aspects in the debate part of the system. First, you narrowly and proportionally kept fees to a reasonable proportional basis on some debit cards, but not all. And second, you went after david curd routing an important area that needs to be fixed. The debate reserve is working on a debit card update to rule i i which implemented the durbin amendment and would make it easier for merchants to pick and choose Different Networks that are not owned by the incumbent players. I want to point out that europe in canada are examples, many other examples around the world of places that regulate these fees much more aggressively across debit and credit networks. The fact is, there interchange rates are lower and lower. I believe europes rates under the interchange fee regulation, i f r i believe their rates are about 10 of u. S. Rates. U. S. Rates are not restrained. We need the durbin amendment, we need to expand the durbin amendment. There have been some important actions taken by the department of justice and the federal trade commission. The federal trade commission doesnt have jurisdiction over banks, but it does have jurisdiction over the Card Networks. The federal trade commission has forced visa to change the way consumers are told about their choices in using swipe kurd machines. The department of justice in particular went after visas acquisition of plaid a nascent competitor, that does a lot of important work. I look forward to working with the committee and other solutions. I strongly support talking about having a disclosure on your bank and credit card statement that says how many swipe fees you have paid. Consumers dont know where to swipe fee is than they would know. Thank you. Thank you mr. Mierzwinkski, mr. Kim, from commerzbank. Good morning, chairman durbin. Ranking member grassley, and members of the committee. Im pleased to testify before you today on behalf of commerzbank team members that serve commit communities in americas heartland. Commerzbank its a mid sized bank founded in kansas city in 1865. We employ talented people in almost every state represented on this committee. We offer a full sweep of payment services, including debit and credit cards for consumers and businesses, and merchant card Acceptance Services that keep money moving. Those communities we are privileged to serve. As well as all of the world, seven by 24 wherever our customers are traveling and shopping. Something that would be impossible without interchange and the networks. The views expressed in my testimony are broadly held among my colleagues at the thousands of mid sized and Community Banks across the country. Just this week, letters have come to this committee signed by state banker associations Community Banker associations, Credit Union Leagues and minority owned banks. From small to large, from public to non profit mutual banks and cooperative Credit Unions owned by their depositors. Urban, rural and suburban, we are united in our view. Price controls in the form of interchange regulations like the durbin amendment, harm consumers, harm Small Businesses and harm communities. So what is interchange . Is there a competition problem around it . Simply put, our Payment System requires constant investment and protection. We need a fair way to pay for it. I believe both banks and merchants should share in the cost of the Payment System. Banks and Credit Unions invest billions into building and securing the Payment System before, during and after the sale. Merchants contribute to those costs by paying a small fee when they use the system to make a sale. That is interchange. Pay their share. There is a fee, and there isnt a proportionate way to pay their share. When we compete for merchants card business, it is extremely competitive. We are up against many players trying to give the merchant a slightly better deal. That used to mean just other banks selling a card terminal, but today there are many independent providers competing. I think the average merchant probably gets tired of hearing from people trying to sell them merchant services. Cards are the only choice is today, there is venmo, paypal, square, cash, of clover, toast, rcep, same day aca, buy now pay later, new payment rails and Merchant Payment Solutions at all price points including free, and some more costly than credit. A decade ago, my banks executive chairman testified in the house and predicted that the durbin amendment would cause harm to consumers and thanks of all sizes. We can quantify the size of the harm now, and how the promises made about protection Community Banks in the warring provinces turned out to be empty. Consumers have lost access to preshocking, minimum balance and monthly fees are up, debit card rewards ares case or nonexistent. Small merchants have seen their cards rise. These are findings of the federal banking regulators and respected economics. Research from the Federal Reserve board, dr. Natasha seran, a law professor who is now senior Economic Policy maker in the biden treasury department, banks were 35 to 40 less likely to offer free checking accounts following the passage of the amendment. For the largest merchants, this law has been a windfall. It has helped some get more market share, but for smaller businesses and Financial Institutions that cant get by to a law that encourages consolidation and scale, the cost have been steep. In fact, small banks and Credit Unions, which were prominently proclaims as exempt from the price caps, weve seen interchange revenue drop 30 per swipe on pandemic transactions. This is a direct result of small known as routing mandates. Merchants promised congress they would reduce Retail Prices after the law passed. The fed found that 99 of merchants did not pass on any sick savings to their customers. At the very least, this should make us skeptical about the current demands and the debate rooting roles should be expanded and extended to credit cards. Our nation needs to keep up when it comes to Payments Technology and security. That wont happen if we cut the investment out of our own infrastructure. Countries like china and russia are investing heavily in innovating their Payment Systems, and will present a challenge to americas leadership in this key area of national and economic security. Policies like the durbin amendment create rigid rules and investment caps that limit our potential to do the same. The Payment World is rapidly evolving and smaller Financial Institutions are facing enormous costs to upgrade, offer new products, and stay in the game. Interchange is an investment in american commerce, not a junk fee. I urge the committee to look at both sides of the story and put the consumer first. Thank you again for having me. Thank, you mr. Kim. Mr. Kantor. Think you, chairman durbin. Thank you for having me here today and for having this hearing. We really appreciate the opportunity because we think this is an incredibly important issue. The credit card market is broken. Visa and mastercard centrally set the fees that the banks that issue consumers cards charge. Those banks compete on every other price they set, every other Interest Rate they sit, every other part of their business but not here. They could do it here, they are very vague institutions. This is an incredibly concentrated market with large institutions like jpmorgan chase, bank of america, wells fargo. None of them are setting their own prices. That doesnt make any sense. Then, on top of that, visa and mastercard said the terms by which cards are accepted. Which make sure to insulate those fees from any other competitive market pressure. This is the way they make sure they can stay high. They havent are all courts rule, the system urchins, if you want to take any bees or mastercard, you have to take every single one. The prices on these cards can be incredibly different for these businesses. They can be factors of twice or three times its high. By doing that, and then restraining merchants prices and the price signals that they consent to their consumers, they make sure there is no market pressures here. Thats why we have a market failure. It doesnt have to be this way. And it shouldnt be this way. We need competition in this market. That is the bottom line. There is lots of discussion on this panel, and has been already tos morning, about how many other forms of payment there are. This isnt about other forms of payment, this is about credit cards. Thankfully we have had reform of debit cards, which is quite good. But on credit cards we have not. The interesting thing is as folks on the panel talk about, well, there is buy now pay later, there is cryptocurrencies, theres all these other things. Yes there are. But installment loans and other things are not credit cards, they are conflating these different markets. Senator grassley, this morning, you talked about the rise in prices in different markets. Beef, chicken, other products. Nobody on this committee would think it acceptable if there was a price fixing scheme going on in the beef market that caused prices to be high. And someone else came in and said well, dont worry, everyone can just eat chicken. Its okay. Its very competitive. Thats not okay. We need to deal with the competition problem and credit cards to have a fair deal for merchants and consumers. And frankly, for the u. S. Economy because the hundred and 38 billion dollars just last year that we are for charging fees that consumers dont see, we all end up paying and it does create this inflationary cycle. Particularly because it is a percentage, most of it, a percentage of the transactions. When there is inflation that drives up prices. And look, were not looked saying visa and mastercard caused inflation. They did not. Everybody can have their own opinions there. But it does exacerbated, both because the fees are very high and because the percentage that theyre charged creates this inflation. And look, thats what we would all expect when there is no competition. Its very predictable. One other thing i would like to say on this is, we have heard a couple of things this morning about how there is a payment guarantee for merchants. There is not. The Federal Reserve, every couple of years, looks at debit fees in particular. And they have found that merchants pay 56 of the fraud on democrats. 36 now, look, i dont know what everyone means by guarantee when they hear that word but my gosh, 56 does not say to me that my members are getting a guarantee a payment. They are losing most of it when there is fraud being committed. We need to have our facts straight when we talk about this. We need to have competition in this market. We all know that competition does work. It worked throughout our economy, we do not let folks set other peoples prices in a centralized way in other places in the economy. When we have that type of tom petitioned, prices are lower. We have more innovation. Frankly we have seen more innovations since the durbin amendment on deborah cards with more encryption and other security type innovations a came right afterwards. People have more money in their pockets when there is competition in the prices. They can spend more, that Consumer Spending helped drive the economy. I really appreciate the committee looking at this important issue. I look forward to the conversation. Thank you mister kantor. We will have fiveminute rounds of questions. I will start. It turns out that the issue of inflation was addressed, directly, by the chief Financial Officer of these a. I hope i pronounces name correctly, listen probably, on january 27th earning call. Asked on how inflation impacts visa. His answer, and i quote. Not, not. I mean, we are a beneficiary of inflation. He also said, quote, to the fact that inflation is driving up to a good size, clearly it is beneficial to us. Lets put the rest the theory that this has nothing to do with inflation. It appears to have some of relevance. Can i ask you, mister sheedy, incidentally, myth karet told us that coincidentally april 22nd weve chosen by both visa and master guard as the day to pay rick the was that coincidence or coordination . You need to turn on the microphone, please. I apologize. Senator, we did not raise the fees in april. In fact, 90 of businesses in the United States see a change in the rates that were down by 10 , affected with the april changes. Miss karet, were you wrong . No, we calculated we got a 300page amendment, fee schedule. We calculated exactly the fee increases for us. While some fees went down, others went up significantly. The net effect is our fees when a. Both companies, the same day. Mr. Sheedy, there is a customer that has evidence otherwise. Can i ask you miss kirkpatrick, you are in charge of mastercard north america. I want to ask you about these crazy canadians. How in the world can you explain this . And canada there is a democratic system called interacts. The most widely used democrats and some in canada. It reports it has one of the lowest rates of fraud globally. The website for interact says, and i quote. Interchange rates for interactive its currently set at zero. How is it possible these crazy canadians are getting no interchange fee on debit and have less fraud, i cannot possibly be . Well senator, it is not the fact that canadian merchants do not have interchange fees. In the democrats . There is value in the debit space that consumers derived from transacting at merchants. What do you mean by value . You have to define terms. When merchants shot at a canadian when consumers shop with canadian merchants, they receive value through a form of guaranteed payment, lower risk, purchasing power. Therefore, there are interchange fees on debit transactions in canada. It is a direct result of the value that those merchants are delivering, and consumers are driving. Mr. Mierzwinkski, noted what is happening in europe, lets stick with that program for a minute. Try to explain to me the difference between debit and credit card interchange fees in europe for the European Union has set a standard of 0. 2 in 0. 3 , respectively. 18 and one tenth of what is charged in the United States. Clearly there system is much different than ours. We have no regulation. Other countries like australia, brazil, china, israel, india, malaysia, south korea also lit it interchange fees what lessons can we learn from all of these countries have learned that interchange fees are way too high in the United States. Those countries know that the critical system is a market failure in the ways that the banks are forced to pay all these networks and the consumers are forced to pay increase prices. They are not gonna happen, they said no. U. S. Congress should stressing the durbin amendment, extended two credit cards womb interchange crossed. We make sure i want to understand the scope of entertains fees. If i want to give money to catholic charities, pour the ukrainian refugees in poland. If i use my credit card or democrat to make that donation. Would you be collecting an interchange fee on that transaction, mr. Kirkpatrick . The interchange fee is mastercard does have interchange fees. The banks do charge interchange fees to consumers, rather to merchants across all transactions for the benefit that the benefits are receiving from the transaction. There is a cost associated with servicing that transaction, and serving that account. The interchange fees also apply to sales tax on paying a my restaurant bill. It does. Why . Again, it is the total value that the consumers are driving from shopping at a merchant. Tax on attacks . Its the total value. You cannot just look at interchange as a total value. You are looking at the total cost of servicing that account which includes fraud, guaranteed payment, increased purchasing power, and the ability to use that product anywhere mastercard excepted. And we look at it across the world where interchange fees are regulated and restraint and we dont see this ramp and fraud. Senator grassley. Before my five minute starts i would ask unanimous consent to add several letters from stakeholders into the record. Without objection. As of 2020, statistics show that visa mastercard combined all 84 of all general Purpose Credit cards with the United States. Some would characterize this as a do awfully, able to extract above average prices for the services. For mr. Sheedy and miss kirkpatrick, what would your response be to these concerns . To visa and mastercard abuse market power . I would like to have mr. Kantor and mrs. Karet listen and respond. Mr. Xi di, you want to start us out . Yes, senator, thank you. Senator, we operate in a highly competitive market. Merchants have never had more choice at the checkout. Consumers have never had more choices to be able to pay. One of the things that i think is important to understand about our payments network, and a level Playing Field that we set with interchange is the soon interchange flows through our network and gets passed through, in the same exact manner, several Financial Institutions across the United States. Small banks to large banks and Credit Unions. Theyll compete with one another and innovate in that complex and dynamic marketplace. Autumn in the consumer winds from that competition. When the consumer is empowered to transact with products that are tailored for them, investments are made in the system to manage risks and keep that system secure with high integrity, the consumer is empowered to shop at the point of sale, it is the merchant that benefits from that flow. Any notion we are not operating in a highly competitive market we fundamentally disagree with. Do you have anything to add miss kirkpatrick . I would say the payment ecosystem has never been more competitive than it is today. In addition to the networks, as i discussed earlier, there is competition that comes from by now pay later providers, while it providers, digital currencies, regional debit networks. You know, the definition of market power is really an institution that can raise prices while also reducing consumption. Mastercard motivations are the exact opposite. We are motivated to drive more transactions through a network, that is how we generate revenue. That is how we win by virtue of that we are incentivized to create balance across all stakeholders. Both merchants and banks. We set interchange rates too high, merchants wont accept. If we set into train rates to low, banks wont issue. Therefore our goal is balance. Our goal is consumer value. Mr. Kantor and then missed karet. Thank you, senator. That is not how it works. This is not a bouncing of the marketplace. Economist in the kansas city federal visor have looked at this. They say because merchants and retail in the United States are so competitive, these fees can gets that well beyond any semblance of value, up until the only break point is where the retailers would actually lose money and go under for accepting the cards. That is the one break point. Look, in other markets we dont say because something has great value we allow price setting, centrally, rather than competitive market prices to rule the day. As you talked about in your Opening Statement, with beef prices, chicken prices, and others. Just because those are valuable products, many of us need to eat them, right . To survive, its really important we wouldnt say, then they can just centrally fix the prices. Thats okay. There needs to be a market system to discipline those prices. We dont have that here. Frankly, the innovation in other types of technologies and payments does not make up for the lack of innovation and the antitrust problem in credit cards. In fact, it really shines an incredible spotlight on the fact that we have not had that type of innovation in credit cards. They have an advance. The market power and visa and mastercard have been incredibly stubborn. They have held on to that market, including ever since the department of justice won a Second Circuit decision finding, in the Supreme Court that both visa and mastercard have market power in this market. Miss karet, abbott dont repeat. I will do my best, thank you. I would like to comment this from a slightly different angle. Our average store carries over 50,000 items. Every single one of which is negotiated in terms of price, how we market it, how we merchandise it. When Procter Gamble comes to us to the cell tied, of which there are, lets say, 50 different sizes and flavors of it they dont come in and say, you have to take all 50. They dont come in and say, take it or leave it. They dont come in and say, you cant promote it you cant incent people to do one thing versus the other. Visa and mastercard effectively control over 80 of the credit market. They are the only vendor with which we cannot negotiate. It is a take it or leave it proposition. That, again, i am not an economist i dont know if it technically qualifies at a duopoloy to me if it walks like a dark and it talks like a duck. I will have two questions to submit for answer in writing thank you on the democratic side the poly note the presence of senator tillis at this point. Then deter brew menthol. Thank you senator chairman. Thank you senator dormant for his leadership on this issue over many years. All of us who have served at the state level, i served as state attorney general for a number of years as mr. Mierzwinkski dont. We are deeply grateful to your leadership. I am just a country loyal from connecticut. And miss karet, i spend a lot of time on the road in connecticut. I spent a lot of time inconvenience yours and pumping gas. I hear, and see the anger, of consumers when they go to pay for what they buy. I know that the Credit Card Companies are not the only ones responsible for the skyrocketing prices at the pump or any of the other commodities. There are big oil companies, we are gripped by their greed. They prioritize shareholder profits, keep supply constrained, they drive prices higher. That is one of the reasons why i haves helped to spearhead, with senator whitehouse, a measure called big Oil Windfall Profit tax act. Which would establish a tax on industry profiteering and Lower Consumer cost with relief rebates. I am struck in your testimony, that the vast majority of gas for American Consumers have seen its fees rise by as much as 26. 5 . Consumers in connecticut are hit by that increase in fees. 26. 5 increase in a single year, as they are struggling with fees, higher prices now, i understand the card industry says they have imposed a cap on those fees at 1 intense ends. But, that doesnt adequately can protect consumers, to the . Senator, that is a wonderful question that you have asked. It is a very complex question as you know as we are dealing with Global Economy issues, specifically what would you like me to respond to . But i would like to know is, how are consumers impacted by the 26. 5 increase . As we all know, the retail price of gas is at a historical high right now. That is directly related to the commodity market, where the price of a barrel of oil its also a historical high. It wasnt so long ago that oil wasnt between 60 and 70 a barrel. At some point, early on in the ukraine war, oil hit 140 a barrel. Retail pricing and gasoline is one of the most competitive Dynamic Markets that im aware of. And we follow the street pricing. The margins are impacted as the price of the cost of goods goes up. Let me ask mr. Kantor the same question. Thank you, senator, i think its an important question. Our members sell 80 of all the gasoline across the country. This is including in connecticut. We have wonderful members doing that there. The Energy Information administration has looked specifically at gasoline pricing entity divided up the country into the different regions and found that there was 100 pass through of both Cost Increases and cost decreases into the retail price of gasoline in every region of the country. And so these fees, without question, get paid by consumers every day. I will tell you, 26 and a half percent its an unbelievably high increase. Our members are reporting to us that this year at their fees are up much more than that. We had a member we talked to this week, their fees were up 49 this year. This is completely unsustainable in an industry where we know people are upset about gas prices and just, by the way, for the retailers themselves as gas prices go higher their margins get smaller. The ftc has documented this. The fees get higher at the same time. We have members that literally, some during the past few months, who sold at no margin to keep some market share. The term has been used by the officials from fees and mastercard, this market has never been more competitive, it is highly competitive, that but they are including in the market Different Companies like apples and oranges, correct . Thats exactly right. And let me ask you, what can the ftc do in the absence of legislation . Can it act to try to foster competition . The ftc has investigated and done some good things, for example, when there were problems with the way visa and mastercard controlled what was happening with the payment card terminals that accepted iain chip cards. They have had open investigations by visa and mastercard to try to block the competition on debit cards. Theres some things they can do, but theyre limited because they dont have jurisdiction over the Banking Industry. The department of justice has taken some action as well, in fact, their antitrust division has perhaps brought more cases in the payments area than any other area overtime. As you know, litigation is hard. It takes a very long time. It is best at finding compensation for past problems. Congress is best at designing, well, what is the way for the future to look in terms of having a competitive market. Thank you. Senator blumenthal . Senator lee . Thank you, mister chairman. Anytime were looking at a competition issue, im always interested in how it affects consumers. Representing my state, as i do, im always concerned about how things affect utah. You tongs have suffered to a acute degree, as a result, of the rampant inflation. It has resulted from excessive federal spending. Since the beginning of last year, youve seen expenses go up more than 700 a month. Just their ordinary monthly expenses. Were talking 80 400 plus per year, just by the same basket of goods and services that they were purchasing before. But it is all marc spence of now. Whatever approaching this, or any other topic in the party competition, im looking at how it will affect them, how it does affect them. And what, if anything, can we do about it . With that in mind, mr. Sheedy, lets start with you. There are those who have argued that it is anti competitive, it is anticompetitive Cartel Behavior for banks, through the visa and masterCard Networks, to get together and collectively agree that there are going to change chart same interchange fees to merchants. What is your response to that . Senator, visa sets the interchange fees. These default interchange fees that pass from merchants acquiring banks to issuing banks. We do that on our own. We dont do that with we certainly do it with input from the marketplace, the impact that the pandemic has had on merchants has been really important to us. At the front end of the pandemic, weve lowered rates for supermarkets, restaurants and education merchants. Or recently, 90 of the merchants in the system will receive a 10 reduction in the race that they process. What is really important, and what i would like to stress, as we are not raising rates. The average rate in our system for visa credit has been flat since 2015. I get that, and i have a bit of time. I want to be clear what im asking. Im asking you to respond specifically to the charge that it amounts to Cartel Behavior too agreed to charge the same interchange fees. We disagree, senator. Setting of a default interchange fee, we feel, is highly competitive in the ways in which it delivers the same interchange fee to thousands of Financial Institutions that dont go into the marketplace on behalf of consumers and merchants and compete and innovate. We feel that the model works very well in a system where you need tens of thousands of banks supporting millions of cardholders and merchants. Theres no way to operate the system other than setting the default interchange fee. For there to be a network . In other words, you need the network for your system to work . In order for there to be a coordination of activity, where consumers can transact from a card that is issued by a credit union in utah, with a merchant in new york, online, or in person, you need to have a default interchange fee so that you know how the economic flows are going to work. Having that be the same interchange fee, irrespective of the size of the financial institution, from a competition. Mr. Kantor, what is your response to that . One, they dont need to do that. I submit it with my testimony an article from nyu, economist he pointed out that because of the concentration of the market, both on issuing side and on the acquiring merchants side, 90 contracts would cover 72 of all the credit card volume. Those big banks could easily set their own prices, you dont need that going on. There has been much more concentration since then. The other thing i would note is, having the same fees does not promote level Playing Field competition on the banks side either. John bloom, from the Community Bankers, testified previously before congress in hearings that they are costs per transaction, because there are smaller institution, were much higher than the largest banks. But if you lock them into the same prices on higher costs of course theyre not gonna be able to compete in the same way. And those large banks have won over a lot of the small Bank Customers into the credit card market, which is why credit cards is so much more concentrated than debit cards as a result of that. Mr. Kemp, go with me and if you ought to respond to this that is great to, but i was gonna ask you separately what would happened to credit card records in the universe in which you imagine that they are are suddenly an alternative network for which merchants could process transactions . So the interchange pays for roughly 60 of interchange revenue, it goes out in the formal rewards. It goes not just of the wealthy, Everybody Loves rewards, its a much more broadly distributed value that people of all socioeconomic that value levels find. In debit there were debit rewards before the laws changed. Those debris rewards largely went away because interchange help subsidize those things. You would see those rewards go away. Furthermore, you would see banks of my size and smaller, maybe even somewhat larger the economics of issuing credit cards, its not what it once was. This is a lot of competition. Its harder to do the fake banks, its interesting, to come back to the last question, maybe you could cover under no, maybe you cant, i dont even know if i agree that the largest banks could negotiate with billions of merchants to set the interchange. If they could, that would put me out. Because i cant. Mister chair, i see my times expired. Ive one followup question. If i understand you correctly, the banks with still kept paid for that transaction . But they would get paid less and likely rewards programs would be the it would be a casualty . There might be something left, but there might . Not depending on the, rate i would assume we would get paid. If that is the case, couldnt one argue that this is a manifestation of a lack of competition and that the prices being artificially inflated by lack of competition, the consumer rewards provide a means of sharing the monopoly rents in order to inflate demand and squeeze merchants . What is your response to that . The purpose of rewards us not to squeeze merchants, its a Value Proposition that makes people want to use your card. The competition, you know, the reward space is an intensely competitive space. Again, its hard for a bank my size to compete with the likes of chase that strikes a deal with southwest airlines. Perhaps that continues, it wouldnt be as rich. But again, it puts me out. Thanks, mister chairman. Thank you senator lee, senator coons. Thank you to you, and the Ranking Member, for convening this panel. Im glad to see we have represented the whole range of potential input, consumers, consumer advocates, networks, merchants, and a bank that is a credit card issuer. Clearly i think we have to look at all of these four different sides of the credit card transaction universe. Or attempting to try to assess whether or not theres sufficient competition, what capping face would do, with the consequences might be. Mr. , can im glad youre able to testify and provide a bank issuers perspective. Ive heard from Credit Unions, Community Banks, large banks and by state that occurred occurred issuers. They depend on interchange fees in order to support their credit cards that they offered to consumers. Credit unions and community pranks in particular are concerned that a substantial degree sun interchange would mean they can no longer sustain card programs that extend credit to individuals who might otherwise not be able to access credit cards. So i think the issue here isnt just losing rewards programs, but losing access to credit and losing the ability of smaller issuers to participate in compete at rates that are lower than you might get from major cards. How do issuing thankful an interchange to offer credit services, and what impact would be if their revenue substantially declined from your bank . I think youre on the nose. Interchange is one source of revenue, interest and fees on the credit card are another source of revenue. One of the things that makes small small bones is very expensive, thats why you dont see a lot of people doing, it thats white moves on line where the costs are lower. Weve been pushed out of the business because the revenue stream is just not there. In fact, you know, the interchange used to make it a more profit business, but in fact now that we pay the rewards out to the consumers, its squeeze that as well. So i think what you would see, the very smallest of banks, they depend on large banks like us to help them issue credit cards the margins there are even thinner. I think you would just see that element of competition, of issuing cards from the smallest and to, shuns Credit Unions, from mid size banks, i think you would see that just go away and it would be the larger banks that have the scale that can still do business in a profitable way. One of the challenges ive also heard from retailers in my state, family owned grocery stores, their margins are so small that for them to pay an increase in inter change, or swipe fees, this is just a where you sit depends on where youre listening to. On fraud and data breach, one of the concerns ive heard from the credit union in dover, delaware, is that covering the costs of reissuing cards of investigating, of paying off the cost associated with a major data breach is not sustainable for credit union or a small bank. At least without interchange. Mr. Sheedy, is that something youve experienced . Senator, the situation with fraud and cyber risk and the risk associated with consumers transaction align it is an enormous issue. In a decade ago, we had a similar magnitude of risk at the point of sale with counterfeit cards that have been generated, primarily on the part of data that had been breached by merchants and cyber criminals. We address that with rolling out chip cards and chip terminals. We have the same issue facing us now online. There is roughly ten billion dollars of fraud annually online with merchants and consumers transacting in a way that generates fraud. Among the changes that were making in april, is to encourage the adoption of a security tittle tokens that will authenticate the consumer and provide more guarantees and more assurance to the merchants, so that we can address that fraud. It will require the merchants to do their part. Weve invested nine billion dollars in the last five years in fraud and security protections. Issuers are also investing. We have to make the same type of push to address this broad online than we did in the physical point of sale. Thank you. Im sorry, mr. Kantor wants to address. It senator, if i could, you raised really important points in your earlier comments that i thought would be helpful. We do have a track record around the world of some reforms. We havent found in other parts of the world the parade of problems that mr. Can and some of his brethren talk about. In other parts of the world, credit is still available. Credit cards are still used. There are still rewards, all those sorts of things. I also wanted to clarify that we, as merchants, and laura was clear about this in her testimony, we have not asked for a cap on credit card fees. Theres a different market where we think there needs to be competition. Competition and market prices will help us here in ways that get the types of problems youre worried about. Can i ask a closing question . I would be interested, in mr. Mierzwinkski, mr. Kim, mr. Kantor, now that we have a decade of experience in capping fees for debit, do we know whether the imposition of interchange fee caps led to lower prices for consumers . And better access for lower income borrowers, consumers, in terms of lowcost Banking Services . Mr. Mierzwinkski, if i might, mister chairman . Thank you for the question, senator. I think there are a lot of pressures on banks to lower the prices and to provide Better Services to lower income consumers. A lot of that is being done through partnerships between banks and consumer advocates. On the issue of bank fees, and the price of banking, i think the banks always looked to figure out a way to blame the latest regulation and they love to blame the durbin amendment, i cant believe that the numbers are there to say that the durbin amendment has hurt lower income or all americans. I just dont see it. Chairman durbin, my hunch is that i should conclude this question at this point. Id be grateful if mr. Kantor could briefly speak to it. Sure. Briefly. I would say debit interchange is part of a checking account. Checking accounts have become more expensive for consumers. When that income went away, we have to look harder at how we did business in howie price things in order to make up for that. I would say that lastly, in terms of access to rewards and stuff, people with debit cards frequently are the most credit challenged folks, they cant get a credit card, their rewards went away. They got on top of cards and i would say that that has got to be a limiting access. Thank you, senator. Consumers have saved tremendously. If you look at the five years of the driven amendment being implemented, the Producer Price index that tracks wholesale costs that retailers pay was up 9. 4 . The Consumer Price index that retailers charge to consumers was only up 4. 3 . It was still inflation, small amounts, but it was tremendous consumer savings in that spread. And retail Profit Margins did not budge or go up in the slightest. This is something we should put to rest here because it is a really good question. Retail is wet in the United States . Its one of the most competitive markets there is in the United States around the world. Those Profit Margins lauras industry survives on 1. 1 Profit Margins. The banking Profit Margins are over 30 , the highest industry sector that is tracked that way. It is remarkable one or two things is happening when the credit card industry argues that prices Consumer Prices dont flow through. Either they dont believe competitive markets work, or they have been living so long with centrally setting the fees that they forgotten how competitive markets actually work. Retail is unbelievably competitive. And our chairman, thank you for your points and for the broad range of testimony in todays hearing. Thank you senator coons, and let me out for the record, im sure you are well aware of the infamous durbin amendment did exempt banks with lower than ten billion dollars in assets. That would not apply to mr. Kim spank. The Federal Reserve reported in 2021 but small banks and Credit Unions receive 53. 4 9 of total debit interchange fee revenue in 2019. 13 billion dollars. Even though they only conducted 35 of the total number of debit transactions, it turns out the infamous durbin was a boon to the small banks and Credit Unions. Thank you. D i believe senator blackburn and senator tillis have worked out of agreement . Senator blackburn . Go ahead. Im gonna stick around anyway. Thank you mister chairman. I want to say, mr. Kim, let me come to you on this. I saw you shaking your head about banking profits. Lets continue with that, do you want to share, i think those statistics, a lot of the time thanks look at the revenue is net interest income. I think 30 or 40 applies. But if you go to you think about the grocer pays a lot further costs, it doesnt account for the cost of money. And so, when you do that, the profit margin becomes lower. All right, miss karet let me come to you. I talked to retailers, and heard from some retailers, the talk about how they need to keep this cost. They say it is most harmful to smaller businesses, the mom and pops. When i talk to people who are in the grocery, and a Convenience Store business, they talk a good bit about this because this is something that drives up the overall cost of doing business and compliance, correct . Senator, yes, thank you. Just put this in perspective, picking up on what was said earlier, we operate on about a 1 profit margin. Okay, so talk to me a little bit about how this contributes to this out of control inflation that we have. Because right now, inflation is at an over 40 year high. Youve got the cost of milk and eggs and bacon and coffee, coffee is up over 100 percent when youre buying a bag of beans. And so, talk a little bit about that ad cost and the impact on the consumer. Your consumer. So the way the credit card swipe fees work is their percentages. Right. ,. Right. And so there is more cost we have to bear and pass on to our customers. So that means the price on the shelf for a package of oreos is going to cost more this summer. That is absolutely correct. When they are packing lunches for kids to go to camp, and making a Peanut Butter and jelly sandwich and putting a couple of cookies in their. Yes maam. Okay. Now, mr. Kim, i want to talk with you. I had read the g. A. O. Study that talked about the harmful impact of the durban amendment. And the comment was that it was one of the most harmful laws durbin and regulations in terms of its negative impact on the availability of fundamental thanking services. So give me the explanation of how this is adversely impacting the on banked, and the underbanked. [inaudible] would you step cars, the underbanked would you step it cards. That contributed to the revenues associated with this checkin accounts in the services that we offered them. The revenues went away with debit cards. We increase the cost because we are forced to on those accounts. What we saw on the Banking Industry was a decline in the amount of free checking that was offered. Now, the Banking Industry is resilient. We figure out how to overcome things and overtime, just like miss karet probably can do the same thing in her business, you figure out ways to overcome challenges. And i think the Banking Industry has a good record of Offering Services to the underbanked. And so weve worked our way through that. How did this affect your total customer mix . To their Customer Base grow . Did it as people moved to debit cards . We saw a stagnation there. Not as much appeal at the lower and, where the big numbers are. So, a change to the Credit Rating system. What kind of impact would that have . You know, again, i would say with that would do is reduce the money available associated with offering credit cards. Its kind of an expensive proposition for somebody our size. And its been a declining profitability business for a number of years, a number of reasons. Competition, regulation, its one of the most regulated businesses were in. We spend those money on compliance officers and responding to regulators. That business, theres a lot of trouble if you do something wrong. And we get out. My time is expiring, miss patrick, ive got a question for you. As a courtesy, i will submit it because i want to know what your cost is because you accept the responsability for laws, for fraud, for things of that nature. I would like to know that percentage. What does that mean to mastercard each year . How much of that cost each year . Thank you senator blackburn, before i recognize senator hirono, i ask consent to enter into the record the report of the American Bankers Association. In 2010, the year of the durbin amendment enacted, 53 of americans had free checking. Five years later, under the durbin amendment, the American Bankers Association reports that the majority of americans, now 61 , have free checking. So free checking has gone up, and not down. Senator hirono . Thank you, mister chairman. Its good to know that the durbin amendment had some positive impacts. So thank you. I was told that i actually signed a letter when i was in the u. S. House that raised questions about your amendment, but its good to know that it all worked out. Goodness gracious. Okay, mr. Mierzwinkski, you described in your Opening Statement how credit card fees lead to higher prices for consumers . I saw an estimate that the average American Family spends 700 a year as a result of higher prices due to credit card fees. And you said that the bulk of the interchange fees goes to rewards programs. I was looking at a chart that is 2019, but the chart shows that based on household income, the lower the household income, the greater the use of cash for payments and debit cards. For example, according to this chart in 2019, if you made under 25,000 in household income, you generally paid with cash 55 of the time, 5 credit and 31 debit. And then, if youre making over 200, 000, then it would be 10 cash, 65 credit, 15 debit. So based on what you testified, most of these reward fees goes to higher income people . Is that correct . That is correct, senator. The Federal Reserve economists at the Federal Reserve bank of boston have done studies that show the same thing. Essentially the worse off americans, people who do not have credit or debit cards made these swipe fees. Paid the increase by fees because merchants, due to the rules that are imposed on them by the dominant duopoloy, mastercard and visa, they cannot do anything else but to bake the fees into all costs that all consumers pay, including low income americans. While some of the really large Companies Like amazon and walmart may be able to negotiate for lower interchange fees, Small Businesses do not have that kind of power. That is exactly right. Thank you for that. For miss karet kara and mr. Kantor. I have a series of questions relating to the honor of our and what impact does that law have on the fees paid by merchants bottom passed on to consumers and the elimination of this. Rule was a in greater competition and lower fees . So, the honor all card pretends is that if you take mastercard or visa you have to take all of their products. There are lower Free Products and higher fee products. An fyi product, they tend to be the reward cars that we are talking about. Something that i think you should know is that visa and mastercard are actively transferring customers into the higher rewards cards. We end up paying a higher fee, overall. Merchant cannot say, i am only going to accept this type of visa correct. That is correct. Isnt that a tie in case . So, senator. Someone mentioned antitrust. Senator, interestingly there are two paces to the honor all cards rule both of which are problem. One is, you have to take, as a merchant, every single type of hard, even if they are very expensive. To take the least expensive one. That is destructive of competitive markets on the rates on those cards. The second one, also, is you have to accept cards from every Banking Institution under the visa mastercard umbrella if you want to take any of them. What that does is it tells these Banking Institutions, even the largest ones, that they no longer have any incentive to go to a merchant and say, hey, how about we come up with a deal to do business together . All of the merchants are required to anyway. That is what is so destructive of this competitive market and why it inflates fleece to such a large degree. If we were to eliminate this rule, would it lead to, i think you just answered my question, lead to greater competition . There are no question it would lead to greater competition. There are quite a few roles, other than the static and prices that are problematic here, they need to get dealt with. That is one of the central things getting in the way of real market competition. You want to add something . So in a situation like that and there might have been a case that went before the Supreme Court. Merchant said i dont want to take all these i dont want to have to take all these different kinds of cards from one entity. That might be an area for us to explore to eliminating this on our awe karens rule. Wouldnt merchants like that . Especially small merchants . We think that would be a great area to explore to open up the market, yes. Thank you mister chairman. Senator tillis. Thank you mister chairman. I do not want to suggest that i would malign the durban amendment. I think like all policy around here some of the work somebody might not work. We have to look at refreshing things based on the circumstances of the day. Mr. Kim, just to go back to the g. E. O. Reports, can you talk about, a little bit more on the effect that the durban amendment has had on banking in general. Give me the top two, if you have to. So the g. E. O. Report you dont to take my word for it take to government about a villain in office. Top five regulations. The most significant affecting the cost of basic Banking Services. That is a statement. There are other arguments about those things but that is a fact. And youre going through this, off of the Federal Reserve bank of richmond indicated that nearly 99 of the savings realized by the disturbing amendment were not passed back to the consumer i think we are here ostensibly i am not a cheerleader for businesses on mature later for consumers im trying to figure out if we are configuring policy that will have a net benefit to the consumer. It would suggest that the durbin amendment didnt. Is that accurate . That is about that study would say. Thats with the facts and that study would say. You know, figuring out exactly how price changes are passed on is a complicated thing. The durban amendment is a long time ago. That is the fact of that study. And i wanted, mister cancer, if you want to briefly respond. On the last one here so i might be able to dance a bit too. Not too long. The federal bank of richmond, they made clear actually it does not say with some of the credit card industry says. Their study was a survey, did not look at any actual economics a path through. They just did a survey folks. It could not be relied on whether it was passed through or not. They also had bias issues they flagged in their survey. Could it be fair to say that if its at 99 there may have been an unhealthy amount that didnt go back to the consumers . Now, they also asked the question wrong. Merchants dont set their prices by saying this cost went down, now im blowing this price. They say, whats the market . I have to compete with a guy down the street. Overtime, the Profit Margins become very narrow, as was indicated. It goes down to their cost. We all know thats how competitive markets work. Asking is the wrong way to get at it. I want to move to something else. I just want to see if my first impression, you know, when we talk about the dollar amount increasing as a transaction amount increases, is it also fair to say, mr. Sheedy miss kirkpatrick, there is also a proportionate amount of risk and potential default and payment involved . Is it a part of the rationale behind the percentage going up is that there is a risk of fraud in some of those that you have to recapture, right . That assumption is correct. And volumes increase the risk of volume fraud increases. Talk a little bit about talk a little bit about hard not present, additional rising costs in the area of internet transactions. Additional risk that you have to recoup some of the cost or you cant have an operational business. Something that is important for our consumers. Mastercard spending billions of dollars to protect consumers against online fraud. Certainly as volume increases, for us to get more sophisticated. That means mastercard have to invest more to protect against that fraud. We have spent billions of dollars to protect consumers against fraud. Just last year one of our Cyber Security tools prevented ten billion dollars in fraud for consumers across the card not present environment. This camera im saving you for last. Senator, thank you. I want to transact online, they enjoy the convenience. Merchants finally can reach new customers and lower their cost. Providing services online. The difficulty is the way the system works at the moment, safety and security have been on high priority, there is still too much fraud, too much uncertainty. One of the changes we are making in april, we created an inter center through interchange. Its not just a path through, it is a mechanism to make the system more safe more secure. One of the changes we made in april, we have seen rapid adoption of the secure digital tokens to better authenticate transaction online. Consumers and merchants can more safely and assured the transact. That is good for everybody, that is good for merchants and consumers. Isnt it fair to say that if we were to go in and dramatically decrease what you could charge to recoup the cost of your operations, you would have to take a look at the people you would be willing to issue a credit card to . Wouldnt some of the most credit challenge be hurt the most by this . If you have to make a business decision about the population you could serve . One way to answer your question, senator, is when interchange has been priced rated by governments around the world and in other markets, you see a narrowing of the issuance of credit cards in those countries. Thats logical. Those fees to those consumers and going up. The features and the benefits they get from those cards goes down. We think that will be a horrible outcome. Miss karet, i am very sensitive. We have a lot of retailers in North Carolina across the nation, a lot of the recipients a paycheck protection program, a lot of other things that we implemented in response to the impact of covid was to recognize that we have got a lot of businesses out there on the bubble. I know that your sector is struggling mightily with some of the shutdown and other things that weve been dealing with lets assume that the fees were cut in half. But that solve all the problems in your industry . [inaudible] the answer in the laugh was all i needed. Part of what were doing is having a meaningful impact in the reduction in Consumer Prices there are a lot of the policies we have to talk about here. It is not gonna make the difference. You have a lot of supply chain problems you have a lot of inflationary problems. Tell me a little bit about, if you could ask karen grist to act on any policy matter that would help the retail industry, with this be on the top of the list . Or are there other things we should be looking at to fix the fundamental problem like yours are suffering through. Senator, thank you so much for asking that question. If you will indulge me for one second. I will indulge you as long as the chair. Well if the chair would like to indulge me as well. That like to go back to the frog question. Theres a very important fact that have not been stated. Its the merchant bears the cost of online fraud. What has happened, through covid and through natural conservative years, the mix of shopping has moved online. So our costs are also going up from that perspective talking about the cost that these guys have invested, which i believe they have in terms of anti fraud i think it is really important to remember that we are paying the cost for online fraud. That said to answer your question in terms of what i would want the credit cards wifi issue is one of the biggest issues that we have the i think that the government has a role in. I dont know today what the government could do related to our inability to sourced toilet paper that is actually from the beginning of the pandemic while we have plenty to elaborate renown but. Credit card fees as i said before we operate on a 1 profit margin bank fees today are our Third Largest cost. We actually pay more in bank fees than we make. What we are looking for is fair competition. Not asking for huge regulatory things with caps and decreases if you want to have decreases, i will take them. That is not what we are asking for what we are asking for is to create a level Playing Field so that there is competition. Whats doug said before is exactly right. Competition works. In this industry there isnt any. I do believe that is the role of our government. To create level Playing Fields. No were gonna have a hearing this afternoon thats kind of loosely related to the subject but i also think its something that we in the past city of banking should take a look at. I believe in hyper competition. I believe it is incredibly important. If there is a basis for any competitive behavior, we have a division in the doj to deal with it. I think a lot of the things we can do to kind of ease the burden and address these issues, i will look forward to taking up in the banking committee. Thank you all. Thank you senator tillis, by virtue of the miracle of zoom i think we will join the senator from minnesota. Are you on board . I am on board. Thank you very much chair durbin. I want to first ask, as you know, mister chair, one of my jobs is the chair of the subcommittee on antitrust. I do a lot in that area i thought i would take a different quote and ask you about this mister kantor. A number of our witnesses have testified about a lack of competition in credit and debit card markets resulting in higher interchange fees that can harm consumers, merchants, do you think stronger antitrust enforcement could lead to stronger debit and credit card markets . Thank you senator. I do think more and better antitrust enforcement would be welcome here. It is needed. This is an area where the antitrust division of the department of justice has been active over time, as has the federal trade commission. There is a lot more to be done. These litigations go on for a very long time. Involve lots of economists. There are, as we pointed out, big pieces of the puzzle that are still unresolved. How the fees get set the rules and restraints that go around protecting those fees from Market Forces. Absolutely, more enforcement would be welcome. Very, very, good. In your opinion and you know we have an active antitrust division. You have interest in going after cases. In your opinion, what is the impact of Supreme Court decision mike ohio the American Express in competition markets . We disagree with the opinion in American Express versus ohio. We think it will cause problems not just in this area, but quite frankly dealing with other Technology Platforms that have been a focus. I know senator of your subcommittee and others in congress, that could be problematic. What is important to note though is that even under the standard articulated in American Express versus ohio this credit card market is an antitrust problem. There is plenty of consumer harm in the record of cases that are going on right now. Showing that in fact it is an antitrust problem. That said, as i mentioned earlier, there is an Important Role for congress to play here to decide how competition should work going forward. So we have some. These antitrust cases, while very, very, important, you know . Courts really have a different role in this. We want to play attention to congresss role, here as well. Very good. Yeah, the way i look at it this is all offtopic but if you have monopolies, like we have in the tech area google has 90 tech share. There is no doubt we have a monopoly. This is what youre getting out at a very different context. You have to ensure there are rules of the road in place by industry so if there is not going to be a change for the courts in my case with tech which will take years and then you at least have to be able to ensure they are not preference ing their own products inc. Creating an anti competitive marketplace. That is with this is about mr. Kim, i have a question for you. Sure. Okay. You have testified that Payment Systems require constant investment in protection. Interchange fees cover much of that cost. We can all agree that Card Transactions have to be safe, there are cybersecurity issues and threats. Can you elaborate on the type of cost that interchange fees help cover from the perspective of mid size and Community Card issuers . Sure. We have to have seven by 24 Customer Service available to our customers, wherever they are transacting, whatever time zone. When there are problems with transactions, if we are going on networks around the world that are not as reliable, it is important for us to be able to choose our networks. Not all networks are created equally. Sometimes we have to resolve problems. And we are constantly looking at data to try to assess fraud. Weve had substantial from attempts with bots trying to open up accounts opening up credit card accounts and in turret extract money from that consumers and ultimately us. It is that kind of investment in data, investment in information so we can collect cell phone numbers. We can tell people, this transaction went through your card. Was it really . You and we can do that instantaneously. That are just some example so we invest to make the payment transaction work. Okay, very good. The question along the same lines, can you talk about how you see mid size and Community Card issuers fitting into the payment landscape now and into the future . Thats my last question. Sure. That is a challenging thing, you know . We spend a lot of time looking at all of the Financial Technology firms that are getting into the business. Taking away part of it to the traditional Banking Industry. How can we partner with them effectively or compete against them . Certainly as many have said, across maybe apples and oranges but i think its all payments so maybe they are all apples. There is a lot of competition going on there. It is hard for us. We have to be nimble. We have to partner with smart organizations that can help us with networks. My ability to process transactions internationally, all times a day depend on the networks, and depends on the investment on the networks. That is going to be we have to have good partners. We have to hope also. The continued to develop payments ecosystem. I have a few questions first, mr. Kim. We did a few i am familiar with Commerce Bank, living in the region. I want to thank you for continuing to offer free checking even through the onslaught of the durban amendment. You continued to offer free checking. It was noteworthy, i wanted to make sure it was on the record. On a profitability, your bank is doing pretty well, would you agree . You are not exempt from the durbin amendment because your valuation is over 10 million. That is correct, we are doing well but we are resourceful, we are nimble, we figure out how to do things. I would say we did to continue free checking for a period of time. We we introduced it recently in the last year. Glad you did the. When you talk about your Profit Margins, what we are reading here, i will say miss karet, you are dealing with one and a half percent is about as then as it gets in terms of vulnerability. The one thing he said earlier that stuck with me, among other things, is the change in feet came in a stack of papers 300 pages long. It was a very large desk. Did you have to hire a lawyer did anyone go through this with you . We are lucky enough that we have a good team of accountants and lawyers to go through that. It is a very complicated thing to understand. I think purposefully so. To understand what the fees are and how the and changing. Mr. Kantor, miss karet has said she has the staff, professional staff, to do this. You are representing Convenience Stores. Some of them are large change but some of them are not. How do they cope with this 300 page fee change . They cant. 60 of them are a single store operators. They dont even get the hundred pages, frankly. They dont get any of this. They just take the increases. It is very difficult for their businesses. One quick thing i would note, to, with respect to the free checking question i want to clear up. A couple of the questions today dealt with geo a reporter. Geo a got a couple of studies handed to it. At least one of which, maybe both of which, were cited by mr. Kim. What the studies did was they looked at the decline of free checking, starting in january of 2009. The durbin amendment didnt go into effect of october, 2011. Theres actually three years of decline in free checking while this was going on, and i say many, many, articles i frankly ran out of the energy to continue sliding the. This was during the time of the financial crisis. Yes, free checking was going away before the durbin amendment ever happened. Mr. Kim, properly cited the study for noting that free check and even continue going away after passage of the durbin amendment. It was over a year before any of that took effect the study notes that we are not gonna look at other changes in doddfrank. They didnt take effect for more than a year after passage. All of this is all a sideshow, frankly. One, to distract from anticompetitive activity in credit card. But to, to try to discredit the reforms that occurred. Losing free checkin because of the financial crisis and the difficulties banks were in at the time its not the same have a reform that came into effect years later, that the aba numbers you cited shows actually went up when you look at the right time period. Free checking has its own competitive market dynamics. It mostly has to do with Interest Rate environment and how banks are competing and want to compete to get more money in front depositors and the value they place on the. It is an unrelated thing. Senator can i add something on that report. The banks are relying heavily on this g. A. O. Report that claims the durbin amendment has caused the downfall of everything. It is not a study. It is largely based on a survey of a few stakeholders that the g. A. O. Interviewed. Stakeholder said what is the worst thing youve seen . Was it the credit card act . Was it the durbin amendment, was it the creation of the cfpb. And simply a small number of stakeholders said that the durbin amendment were about. I am unimpressed i have been asked by covid19 as one of the worst things we have ever faced. At least for now, who knows, it could get worse going forward. My bottom line is simple. It goes back to 16 years ago, i walked into this room and saw that stack of papers. I had one of the customers a visa massacre say, we cant even get the complete contract. We give a summary of it. We couldnt read if we received. It it is so complex it lacks any effort towards trump currency or simplicity. Secondly there is no competition. They announced the fee changes, both companies, the same day. They are coming at you, miss karet. You know they are. It is a dual engine force in the situation. I do not think thats healthy. I think if you believe in a market economy prompted xin is part of it. Isnt . It shouldnt be . I think thats about most mbas conclude. I will say that this conversation will continue. We are going to have a hearing on the subject at least every 16 years. I think the American People need to know the story about these fees that cost merchants and customers. Why they are not disclosed. I think there would be a rival even more strongly against it. We are facing inflation. The last thing the American People need are higher slight fleece. I was hoping the companies would resist there to making company. I will haul this, all will be included in the record. At this point the hearing stands adjourned. Thank you [indiscernible chatter] [indiscernible chatter] [indiscernible chatter] [indiscernible chatter] [indiscernible chatter] [laughter] [indiscernible chatter] the White House National drug control policy says the overdose crisis in the United States is destroying american lives and livelihoods. Dr. Raul ghouta testified before the Oversight Reform Committee on the 2022 National Drug strategy and the response to the overdose and addiction strategy. This hearing is just over two hours. And now recognize myself for an Opening Statement todays statement focuses on an issue of urgent importance to congress. To families across the country and to me personally, overcoming the addiction and overdose crisis that continues to ravage communities at every part of the United States as chair of this committee i have work to ensure that every person dealing with addiction can access comprehensive treatment and care when it comes to the bad actors of fuel this crisis, like the settler